Asian Development Bank (ADB) on Wednesday lowered India's growth forecast for the current fiscal to 5.6 per cent, from 7 per cent projected earlier, citing falling global demand and impact of delayed monsoon on agricultural production.
India, however, can reverse the trend of falling growth by promoting economic reforms and taking steps to improve investment climate, said the ADB's Asian Development Outlook 2012 Update.
For the Asian region as a whole, the ADB Update expects the Gross Domestic Product (GDP) growth rate to drop to 6.1 per cent in 2012 from 7.2 per cent in 2011. The growth rate for the region has been projected at 6.7 per cent in 2013.
"The deceleration of the region's two giants, the People's Republic of China and India in tandem with the global slowdown, is tempering earlier optimism," ADB said.
As for India, it said that growth rate will decelerate to from 6.5 per cent in 2011-12 to 5.6 per cent in the current fiscal. ADB had earlier projected the country's growth rate at 7 per cent for 2012-13.
The growth rate for 2013-14, according to the ADB Update, has now been estimated at 6.7 per cent, down from 7.5 per cent projected earlier.
Falling global demand and a delayed monsoon curtailing agricultural growth have exacerbated India's recent economic slowdown, and have led to reduced growth forecasts by the ADB for fiscal years 2012 and 2013, ADB said.
"India can start reversing this trend by improving its investment climate and expediting reforms," ADB Chief Economist Changyong Rhee said.
The delayed monsoon and weaknesses in the agricultural supply chains, coupled with rising costs of fertilisers and irrigation, are likely to result in subdued farm growth and sustain pressure on food prices.
Moreover, industrial output is expected to remain subdued in 2012-13, while weak demand from industrialised countries continues to take its toll on exports, ADB said.
Rhee further noted: "Tight monetary policy to counter persistently high inflation and a high deficit leave little room for policy to stimulate growth. However, restoring investor confidence can help jump-start critical infrastructure projects that could get the economy moving."
In its mid-quarter monetary policy review last month, RBI had kept the lending rate (repo rate) unchanged in view of high inflation but reduced the Cash Reserve Ratio - the portion of deposits that banks keep with the RBI.
"The government has made some headway in addressing these challenges recently," ADB said, adding, "these steps have boosted business sentiment and raised hopes for further policy actions."
The government has recently taken a number of reform initiatives like opening the multi-brand retail sector to FDI, hiking diesel prices by over Rs 5 a litre, capping the number of subsidised LPG cylinders to six per family a year, allowing foreign carriers to pick up stake in domestic airlines and liberalising FDI rules for broadcasting sector.
"FDI in retail will result in substantial investment in a modern agricultural supply chain that will reduce huge food losses from farm to market, helping farmers and consumers," ADB said.
As regards to developing Asia, ADB has significantly scaled back 2012 and 2013 growth forecasts saying that 'after years of rapid growth, the region must brace for a prolonged period of moderate expansion amidst an ongoing slump in global demand'.